Posted by: Josh Lehner | March 20, 2019

Urban Wage Premium, Pacific Northwest Edition

New research from MIT’s David Autor has set the economics profession on fire in recent months. The reason is it furthers our understanding of the impacts of job polarization, wage stagnation and the implications this has on migration and the urban-rural divide. What follows is a summary of his new research through a Pacific Northwest lens.

A generation ago, workers of all stripes earned higher wages in large, urban areas. There was an economic incentive for individuals to move to cities. Workers responded accordingly and our metro regions have thrived.

This urban wage premium was largely about the types of jobs available. Urban areas contained most of the good-paying, middle-wage jobs as that was where businesses were headquartered and operated. As Autor writes:

“In the decades following WWII, there was a steep, positive urban gradient in the skill level and wage level of non-college jobs. Non-college urban adults disproportionately held middle-skill, blue-collar production and white-collar office, administrative, and clerical jobs. Because these workers labored in close collaboration with the high-skill, urban professional, managerial, and technical workers who oversaw factories and offices, middle-skill jobs for non-college workers were prevalent in cities and metropolitan areas but scarce in suburbs and rural labor markets.”

However, in recent decades there has been a decline in these types of jobs due to job polarization. As is well known, these changes have impacted traditional blue-collar, male dominated occupations like production — the manufacturing jobs that actually do the manufacturing. However it impacts women to the same degree due to the loss of office support jobs. These shifts can largely be traced to automation and technological change, however Autor notes that offshoring, erosion of bargaining power, falling real minimum wages, and the fissuring of the workplace also play a role.

The problem with job polarization is not just the loss of a middle-wage job, it’s when that worker is unable to land a similar paying job in its place. Autor’s research finds that “almost all occupational change among non-college workers reflects a movement from the middle toward the bottom of the occupational distribution.” This is in-line with what we found HERE and HERE in Oregon as well. These adjustments are disheartening as most Oregonians either end up taking a low-wage job or drop out the labor force entirely (1/3 of women, up to 2/3 of men). Autor writes that this process depresses wages in two ways. First, by taking a low-wage job, a worker simply earns less. Second, the labor pool is larger and as the supply of potential workers outstrips demand, the price (wage) falls.

The result is that workers today without a college degree perform the same tasks in urban areas as they do in more rural areas. As such, they are paid the same relative wages. A high school graduate working in Pendleton or Sequim earns the same as their counterpart in Portland or Seattle. There is no longer an urban wage premium for workers without a college degree. All of this before housing and the cost of living are taken into account.

Note: The data are based on PUMAs and the horizontal axis shows population on a log scale. Neither of these are intuitive. But as you move left to right on the horizontal axis you go from rural areas to urban ones. For some context, all of Eastern Oregon and Eastern Washington (ex Tri-Cities and Spokane) are in the 1-3 range. Boise, Eugene, and Medford are around 4. The Portland and Seattle areas are 5+.

So what are the implications of these changes to the economy and will these trends reverse?

Well, without a financial incentive, workers without a college degree will continue to move to urban areas less frequently. This reduces the relative labor supply in cities, placing more pressure on firms looking to fill low-wage jobs. In the past year or two we have seen a big rise in employment rates for individuals with a high school diploma or less and wages are rising the fastest at the lower end of the spectrum. Conversely this shift raises labor supply in smaller metros and rural areas, supporting stronger overall growth in these locations.

This sorting by job opportunities, educational attainment and the like is not complete, but is ongoing. The combination of high housing costs and low wages, or low-wage opportunities drives much of it. The economy is searching for a new equilibrium. As Marginal Revolution‘s Alex Tabarrok points out some of these changes are endogenous. That is, firms who do not have be located in expensive urban areas have located elsewhere, hence some of the decline. Autor points this out as well and highlights that manufacturing jobs have shifted out of cities into suburbs and other areas as transportation networks improved. But for now these trends point toward young college graduates continuing to drive population growth in Portland and Seattle, while the other regions in the Pacific Northwest should see more balanced gains.

Finally, I must note that Autor himself calls for further research into these processes and findings. He provides strong evidence of the likely dynamics behind these trends, but does not say this is the only possibility. In particular an occupation is not a labor market. Urban areas are not truly independent of rural ones. Everything is interconnected. Just because demand for one type of work or in one location declines, it does not necessarily mean it hampers trends across the entire economy. Given how relevant this research is to many different policy areas, I suspect we will see lots of papers fleshing out this research in the coming years.

Bottom Line: Obviously we, as a society, have know about some of these dynamics for a long time. What is new is how Autor combines these insights to look at how job polarization and geography meet, overlap, and intertwine. What he finds is highly informative and can largely explain big picture trends in recent decades. As such, the research is also depressing. The good news is that a strong economy does work wonders, even if does not cure all ills. Job polarization is most evident in recession. During expansions, middle-wage jobs do grow, particularly those driven by population gains, but they do not fully regain their share of the labor market.

Posted by: Josh Lehner | March 13, 2019

Industrial Diversification in Oregon

Last month we examined industries and regions in Oregon that grow faster (or slower) and are more volatile (or stable) than the overall economy. Today we follow up with a look at industrial diversification and how that has changed over time in Oregon.

First, when we look at industrial diversification, economists typically look at how many jobs are in each sector of the economy. A more diverse region has a smaller number of jobs in a lot of different sectors (e.g. manufacturing, health care, etc) while a less diverse region has a large number of jobs in just one or two sectors (think oil in North Dakota today, or timber in Oregon in the 1970s).

Second, in and of itself, industrial diversity is not necessarily good or bad. If a regional economy has one big industry, like North Dakota today or Oregon in the 1970s, the region can do extremely well when that one industry is booming. The problem arises when your one key sector is down. Then your regional economy suffers more as there are fewer other types of businesses to drive growth. This tends to make less diverse economies more boom-bust. Depending upon the duration of the cycles, this is either a net win or net loss relative to the rest of the country.

Third, it is hard to predict what type of shock will hit the economy in the future. Depending upon what exactly is the catalyst for recession — think technology in 2001 and housing in 2007 — a regional economy may do better or worse depending upon how reliant the region is on that particular sector. For example here in Oregon during the 2001 recession the Portland region was hit particularly hard due to its high concentration of tech manufacturers. The rest of the state experienced significantly smaller recessionary impacts. Similarly during the Great Recession Bend and Medford were hit especially hard given they experienced two of the nation’s biggest housing bubbles. Other parts of the state were not spared, but saw relatively fewer losses.

Overall a more diverse economy is better able to withstand different types of recessions, especially given we cannot accurately predict the nature of the next shock years in advance. Spreading a region’s eggs across more baskets tends to be more resilience over the long run.

The next two charts try to show how Oregon and some of our regions are doing on diversity. What the charts measure is the local mix of industries relative to the mix of industries nationwide. A value of 1.0 means the local mix is perfectly aligned with the U.S. mix. The U.S. overall does have a broad-based economy when compared internationally. A given region will never perfectly match the U.S. given we do have some regional specialization (autos in the Midwest, timber in the PNW, finance in NYC, etc). But values closer to 1.0 mean a more diverse economy overall.

Across Central Oregon, industrial diversification is at record highs. Bend’s evolution from a small timber town to a fast-growing metropolitan area is clearly seen in the data. Keep in mind that the U.S. overall (the baseline comparison here) is continuing to evolve, so when a region’s line increases in the chart, that region is diversifying at an even faster pace than the nation.

In Prineville (where I am giving a presentation this morning) they do see lower levels of diversification being a smaller, rural economy. They have higher rates of natural resources and federal government (land management), and lower rates of more urban industries like finance and professional and technical services. Crook County’s lower levels of diversification are also seen in manufacturing. Overall Crook’s manufacturing sector is nearly identical in size to the U.S. (proportionately). However 75% of Crook’s manufacturing is wood products, while the U.S. as aerospace, autos, metals, semiconductors and the like. All of that said, Crook County’s industrial diversification has nearly quadrupled in recent decades. Hopefully this bodes well for future business cycles.

On the other hand, the Portland regional economy is pretty diverse and broad-based today, more so than many parts of the country. However from this high level of diversity, Portland is not increasingly becoming more like the nation. Now, Portland does retain some specialities like semiconductors, the outdoor apparel cluster, and the like. But overall, Portland’s evolving industrial structure is matching trends with the country.

Finally, it is important to keep in mind that there are good and bad ways a regional economy can become more diversified. The good way is when a new business opens up and brings with it jobs and investments from a sector the region didn’t have before — think of the software jobs in Portland or the data centers in Prineville. These communities are more diverse today due to these newly created jobs.

Conversely, a region can become more diversified and more like the U.S. if it loses its specialty industries — think of the timber decline here in Oregon. Today we are more like the U.S. mostly due to growing jobs in other sectors, but also in part due to the loss of timber jobs which mathematically makes us more like the nation as a whole. You can literally see the old mill closure in the Bend chart above. In Crook County back in 1978 a full 50% of private sector jobs were logging or wood products, whereas today it’s closer to 12% of private sector jobs.

Overall, a diverse regional economy is better able to withstand different types of recession and be more resilience over the long run. Even so, it is clear that diversification can be a two-edged sword.

Stay tuned as we will highlight some new research that touches on the impacts of this bad type of diversification and also ties in with the educational attainment, wages and migration discussed earlier this week.

Posted by: Josh Lehner | March 11, 2019

Educational Attainment Continues to Increase

A few years ago we looked at educational attainment across generations here in Oregon. What it showed is that educational attainment is increasing over time. That is, Millennials are obtaining college degrees at higher rates than Gen X which did so at higher rates than Boomers and the like. In the latest Census data these trends continue. Millennials in Oregon today are well on their way to reaching and surpassing the 40% mark with a Bachelor’s degree or higher. In fact the 1985 birth cohort is currently sitting at 39% at age 32, while the 1990 birth cohort is at 36% at age 27, both of which are records for the fastest pace to reach these marks.

However, we also know two other items: Oregon is magnet state, and migration is strongest among young, college graduates. All of these facts combined have been gnawing in the back of my brain for years now. I have been curious as to the educational attainment of native born Oregonians. It is possible, even plausible that the rise in educational attainment across the state is largely driven by the in-migrants. Does Oregon’s lower high school graduation rate, shorter school year and the like impact outcomes for higher education as well? So to the data we turn.

I want to highlight this gap in attainment between migrants and the native born population to illustrate the compositional effect migration has on statewide totals and how migration may mask diverging trends. But first we must point out that Oregon-born Millennials have approximately the same, albeit slightly lower levels of educational attainment than their national counterparts. Today, 34.3% of Oregon-born 25-34 year olds hold a Bachelor’s degree or higher, while the national figure is 35.6%. However, migrants moving into or out of Oregon have substantially higher levels of attainment as seen in the chart below. And given that the Oregon-born who leave the state have high levels of attainment, it means that the Oregon-born who remain here have lower levels. This is entirely due to the compositional effect of migration, which, again is all about young, college graduates. The gap is not necessarily about lower outcomes.

It is important to remember that Oregon is a magnet state. The inflow of young households is significantly larger than the outflow. Even with similar educational attainment among the movers going in either direction, Oregon’s educational attainment rises overall due to the net influx.

There are two pieces of good news here. First is that if we look at educational attainment of native born Oregonians, it is rising over time like national trends. Now, the chart below just looks at current Oregon resident who were also born in Oregon (my data download is missing those who moved out of state, but we know those folks have even higher rates of attainment). The gap between current residents born in Oregon and born outside of Oregon remains large (as seen in the first chart). This gap is 5-10 percentage points, but is not widening over time or by age cohort, or at least not in the available data.

The second piece of good news is that there does not appear to be a wage differential between the Oregon-born and migrants. Or at least not once we control for age, educational attainment, and occupation. This is important to keep in mind because one of the underlying goals of economic development is not just to improve job opportunities and outcomes overall, but to specifically improve them for a region’s current residents. As we touched on with Raj Chetty’s work on economic mobility, job growth by itself is not enough to improve outcomes. One reason is that economic conditions for current residents may remain relatively unchanged while new residents fill the newly created jobs. We know that the latter part does happen, but it is important to check in and see about the former. And at least in a preliminary look at wages among the prime working-age population in Oregon, this does not appear to be a significant issue.

Stay tuned, there is actually a tie-in of this look at educational attainment, migration and wages to some future work we’re doing.

Posted by: Josh Lehner | February 27, 2019

Economic and Revenue Forecast, March 2019

This morning the Oregon Office of Economic Analysis released the latest quarterly economic and revenue forecast. For the full document, slides and forecast data please see our main website. Below is the forecast’s Executive Summary.

The U.S. economy experienced strong economic growth in 2018. Unemployment remains near historic lows even as participation rates rise. Wage growth continues to pick up along with employment rates. The economy will set a new record for length of expansion this summer at ten years old. The next recession is not yet seen in the data. The outlook calls for ongoing, but slowing growth this year and next. The fading federal fiscal stimulus and business investment slowdown take the wind out of the sails, as does the impact of past interest rate increases. The key to the near-term forecast is the Federal Reserve and the U.S. consumer.

Right now the Fed is reassessing the economy given somewhat weaker U.S. data and ongoing international issues like trade tensions and slowing in China and Europe. Concerns over the U.S. consumer are higher today due to weak sales data at the end of 2018 and somewhat higher delinquency rates. However, given the ongoing, robust labor market gains, consumer spending is likely to hold up and is the key driver to growth in 2019.

Oregon’s economy continues to hit the sweet spot. Job growth has tapered more than expected over the past year, but remains strong enough to hold the unemployment rate near historic lows. Local wage growth outpaces national figures due to the strong labor market. With more Oregonians working more hours and for higher pay, household incomes are reaching historic highs on an inflation-adjusted basis. Even as disparities remain, these gains are seen by all ages and racial or ethnic groups across the state. The feel good part of the economy is here.

With a little more than four months left in the 2017-19 biennium, Oregon’s General Fund revenue picture remains uncertain.  Given Oregon’s dependence upon personal income tax revenues, the jury will remain out until the bulk of payments are received and processed in April and May.

The tax filing season has just begun. Refunds got off to a slow start and the average refund is 11% lower so far this year, in part due to no kicker being paid out. Most year-end tax payments won’t arrive for at least another month. Although April surprises are commonplace, this year’s outlook is particularly uncertain. Federal tax law changes, volatile equity markets, a nationwide dearth in recent estimated payments and strong growth in withholdings are all acting to muddy the outlook this tax season.

Corporate collections have surged to an all-time high in recent months, due in part to temporary factors. Repatriation of foreign earnings required by the new federal tax law have increased collections by around $100 million.  However, the temporary repatriated earnings alone cannot explain the full increase in corporate collections, suggesting that some of the change may be persist going forward.  Federal tax law changes have likely expanded the corporate tax base in Oregon, which will lead to additional revenues in the years ahead.

While the revenue forecast is relatively unchanged in the currently 2017-19 biennium, our office is forecasting both a personal and corporate kicker. The personal kicker is projected to be $748 million which will be paid out on tax returns in early 2020. The corporate kicker, which is dedicated to education spending in the upcoming biennium, is currently estimated at $353 million. Given tax season has just begun, these figures could change by May 15th, the final forecast for the legislative session.

Heading into the next biennium, uncertainty about the performance of the regional economy will become paramount.  Growth will certainly slow to a sustainable rate in the coming years, but the path taken is unknown.  Capacity constraints, an aging workforce, monetary policy drags and fading fiscal stimulus will all act to put a lid on growth a couple of years down the road.  However, the exact timing and steepness of this deceleration is difficult to predict, leading to a wide range of possible revenue outcomes for the 2019-21 budget period.

See our full website for all the forecast details. Our presentation slides for the forecast release to the Legislature are below.

Posted by: Josh Lehner | February 22, 2019

Fun Friday: Eds and Meds

Yesterday we took a quick look at industry growth and volatility in Oregon. Two sectors really stood out for their strong gains and stability: education and health. Both have risen twice as fast or more than total employment in Oregon in recent decades. However there is a clear reason for these gains: demographics. When you adjust education and health employment for population the exceptional growth doesn’t look so exceptional. In fact it looks downright mundane. A growing population with an increasing share of retirees, and rising rates of educational attainment means we need more workers serving these groups.

Now, one tangent I find interesting/perplexing/depressing is when communities, usually smaller and/or rural, do market analyses about growth opportunities, the consultants always come back with the same answer. That is they should try and turn themselves into a hub for tourism, health care, or education. This is somewhat of a circular reference, however. The sectors that are growing pretty much everywhere are health care (people age in every county) and leisure and hospitality (people go out to eat and travel). However this largely reflects sectoral shifts.

Building a broader cluster or hub around these industries is possible, but it is not replicable in every community. There can be assisted living facilities everywhere, and even hospitals in many places, but only one or two can have a Level IV or V Trauma Center. Colleges and Universities are great but only a handful exist in each state. Similarly every community cannot be a tourism hub. Historically it has worked well for Bend and Hood River, but that means it is more difficult for surrounding communities given their close proximity. And communities further from highways and airports face logistical challenges even if the outdoor recreation opportunities are stellar. It is not quite a winner takes all scenario, there are agglomeration effects, but it is also not entirely symbiotic either. And all of this is before digging into the types of jobs created, their wages and the like. /rant

Posted by: Josh Lehner | February 21, 2019

Regional Business Cycle Exposure, Pt 1

Right now the macroeconomic outlook is largely stable. The economy is slowing and is expected to continue to slow over the next year or two. As Tim Duy recently noted, this means we are likely to see more “bad data” or data that surprises to the downside given the overall slowing trend. If we didn’t then the economy wouldn’t be slowing! Case in point being the latest retail sales report from December. While there is some growing concern about the macro outlook, the baseline remains for expansion and not for recession. This also gives me a chance to dust off some work we’ve done in the past year looking at Oregon’s volatility across industries and regions.

Overall, Oregon’s underlying economy is more volatile than the U.S. for two primary reasons: industrial structure and migration flows. Today we’re focusing just on the first part. What we’ve done is borrow some concepts from the financial literature. Alpha refers to whether or not an asset grows faster or slower than the overall market over a long period of time. In this case we’re looking at which industries are growing faster than overall employment over the past two decades. Beta refers to whether or not an asset fluctuates more than the overall market. In the chart below we are looking at whether an industry grows quicker in expansion and falls further in recession than overall employment.

A few things stand out in the chart above.

First, many industries move in sync with the overall business cycle and to roughly the same degree.

Second, what makes Oregon’s industrial structure different is our larger concentration in the goods producing industries (natural resources, construction, manufacturing). These are more volatile over the business cycle and is what helps drives Oregon’s overall volatility. This is not necessarily bad. Just as we talk about with state revenues, there is a trade off between risk and return. When it comes to subsectors like construction, computer and electronic products, food, metals and machinery, Oregon has outperformed the US. We are gaining market share even as they are more boom and bust over the business cycle. On the other hand, subsectors like wood products and transportation equipment we are not gaining market share. Being red in the chart above is not a bad thing. Overall there can be winners in stagnant industries (think Oregon’s tech manufacturing) just as there can be losers in industries on the rise (think of recent brewery closures).

Third, the growth seen in Education and Health — so-called Eds and Meds — is tremendous. Employment has increased significantly faster than in other sectors and the recession hardly impacted the industries, or at least not to the downside. That said, there are some clear, fundamental reasons why and we will tackle this a little bit more tomorrow.

Next, we take the same framework but instead of looking at industries, we apply it to the different metros and regions of the state. Here we see a few more outliers in terms of relative economic performance. In terms of regions that have grown slower, we see our southern and eastern rural counties along with those more closely tied to timber and manufacturing. Among the fastest growing regions in recent decades we see the Gorge which largely skated by the Great Recession, and then the phoenix that is Bend always rising from the ashes.

Tomorrow I will take a quick look at Eds and Meds. In a future post I will dive into industrial diversification at the regional level over the past 40 years. That’s a ton of data work that I am about halfway done with. But stay tuned for that next month. Probably.

Posted by: Josh Lehner | February 13, 2019

Lottery and Gaming Outlook, 2019

The best economic news in recent years is the growth seen in household incomes. They are rising as we have more Oregonians employed who are working more hours and for higher pay. Oregon’s growth has been considerably stronger than what is experienced in the typical state and our median household income now matches the U.S. This has not happened since the mills closed in the 1980s.

Importantly for gaming, households are feeling confident today. Consumer sentiment is high as incomes rise and gas prices remain relatively low. This is translating into more discretionary spending across the board. In fact entertainment spending — spectator events, museums, going out to eat, etc — in recent years has increased significantly faster than income growth or other types of spending. This is not debt-financed, but represents a shift in the types of goods and services households are buying today. Oregon’s aggregate growth outstrips the nation because our underlying economic gains are stronger, and due to faster population growth.

That said, while overall entertainment spending is increasing at a faster pace, it is not being spent quite as much on gaming in particular. Yes, gambling revenues are up, make no mistake. However other types of discretionary spending are rising faster. We can see this clearly in the Las Vegas chart below. Tourists are back to pre-Great Recession levels. Spending on Leisure and Hospitality is at historic highs. However gaming revenues are just now getting back to where they were more than a decade ago. There has been a shift in consumer patterns, even as gaming remains a normal good in most places.

However, even in a relatively strong economy nationwide, some mature gaming markets are seeing tepid gains at best. This is in large part due to increased competition. The states leading growth in recent years (MD, OH, NY) have all recently legalized gaming, added new casinos and significantly increased the number of slot machines. Much of these gains have come at the expense of their neighboring states, who legalized gaming years and decades ago.

With this nationwide background, Oregon stands out. Growth in video lottery sales are twice that of the nation overall and other fast-growing, mature markets like Colorado and Nevada. This highlights the impact of Oregon’s video lottery terminal replacement program has had on sales. Over the past few years, Oregon Lottery has replaced all of the VLTs statewide and upgraded the underlying infrastructure and system. As the new VLTs were deployed statewide, sales increased as discussed before. Roughly speaking, given national trends, half of Oregon’s video lottery sales growth is due to overall economic conditions and half due to the VLT replacements.

Given the cannibalization due to increased competition seen throughout the country, the biggest issue facing the Lottery in recent years was the opening of the ilani Casino Resort in southwest Washington. Beginning with our 2016 forecasts, our office incorporated a large impact from the new casino in the outlook. However, a big impact has yet to materialize. The actual impact on sales is running about 15% of our initial projections from a few years ago. This impact is smaller and more geographically confined than initially expected. As such, our office’s forecast for this biennium has increased considerably — $162 million total, with $102 million coming from stronger video lottery, $43 million due to the billion dollar jackpots, and $17 million due to more administrative savings from Lottery. In somewhat comforting forecast news, our office was not alone in overestimating the impact on the local gaming market. That at least makes us feel a little bit better.

Looking forward, at this point our office does not expect there to be further, significant impacts from the casino on our statewide forecast. Now, there may be ongoing issues, even a further erosion of sales at retailers along the border, but these are not likely to impact the topline forecast much. One main reason is that new casinos tend to ramp up for a year or two before stabilizing, or even seeing some declines. ilani will hit the two year mark here in a couple of months. One potential future change that would cause us to revisit these assumptions would be a hotel addition which would change the casino from a day trip into more of a destination. Our office and the Lottery research team continue to monitor these trends and discuss the outlook.

All of that said, the underlying outlook for Lottery remains closely tied to the economy and income. That strong video lottery growth mentioned above (26%) perfectly matches the growth in Oregon personal income (26%) over the same time period. Lottery as a share of income in Oregon remains stable in recent years, and of course this is lower than the housing bubble highs hit just after the introduction of line games back in 2005.

There are two main points to make in terms of the Lottery outlook.

First, Lottery sales continue to increase. Oregon is and is expected to see increases in employment, wages, household incomes, and overall population in our office’s forecasts. As such, sales and available state resources (transfers) will increase in the future. These gains overall will be in the 3.5-4% range per year.

Second, our underlying personal income forecast for Oregon is around 5% per year. This means that video lottery sales will grow but at a slightly slower pace than overall income in the state. This is due to three main risks to the outlook, excluding recessions and the business cycle in general. One is increased competition for entertainment spending. As discussed, discretionary spending is rising, but other entertainment options like going out to eat, or to the movies or sporting events are grabbing a somewhat larger share than gaming. Two is increased competition within the gaming industry, be it another private casino, online gaming (legal or illegal) or the like. As seen nationwide, gaming competition only increases. Three is the potential change in gaming preferences among younger generations. There is no question that Millennials and Gen Z (still a placeholder name) enjoy gaming. However it is much more Xbox and Playstation and less slot machines and card tables than their parents and grandparents.

Bottom Line: Oregon Lottery sales continue to increase due to an improving economy and new game offerings. The outlook calls for ongoing growth and an increase in available resources for the state budget. However, the outlook is not without risks. Our office tends to view competition for household entertainment spending, other gaming options, and shifts in tastes and preferences to be more downside risks to the outlook. That said, to the extent these risks do not materialize or they have less of an impact — not unlike ilani — revenues will be higher than the baseline.

Posted by: Josh Lehner | February 7, 2019

Marijuana Demand, Supply and Substitution

Notes on three new marijuana research pieces that has come out recently.

First, 2017 state level estimates of drug and alcohol use were released this week. What it shows is a continuation of trends related to marijuana use in the past decade. States with legal recreational and medical marijuana generally see the highest usage rates and have also seen the biggest increases.

Reported usage rates in Oregon have increased substantially over the past couple of years. Oregon is now #1 among all states with 20% of the adult population admitting they have used marijuana within the past month. Vermont (19%), District of Columbia (18%), Colorado (17%) and Alaska (17%) round out the Top 5. Now, it is somewhat of an open question just how much actual usage has increased versus residents becoming more willing to admit usage to federal survey takers. That said, these usage rates are up across the nation. Since 2009, only three states (GA, HI, SC) have not seen a statistically significant increase. National usage rates are up 3.2 percentage points (a 50% increase), with the median state seeing a 2.8 percentage point increase. Oregon’s increase is nearly 11 percentage points.

Second, OLCC released a new report to the Legislature on recreational marijuana supply and demand. Full disclosure, I was on the report’s review committee and think OLCC — Amanda Borup, Peter Noordijk, TJ Sheehy– did some really good work here and want to highlight the findings.

Probably the biggest take away from the report is that over the course of a year, Oregon’s recreational marijuana program produced about twice as much marijuana as was purchased by consumers. There are years of inventory currently sitting on the shelves at retailers, and being stored by producers and wholesalers. This is the supply-demand imbalance that is most measurable because it is in the legal system and tracked (for the most part). We know there is even more supply coming from the black and medical markets, which are not tracked. None of this is a huge surprise given everything we’ve seen and heard in recent years. What is new is that OLCC was able to quantify the imbalance and not just add anecdotal evidence. That’s the part I want to focus on.

Our friends at OLCC tackled at least two big technical challenges. First, they were able to wrangle the available data and create a methodology to reasonably compare supply (harvest, inventory, etc) with demand (sales across product types) on as close to an apples to apples basis as you can. Marijuana is wet and heavy at harvest time, but is sold dried or in the form of concentrates, edibles, and the like. You cannot just compare these final product types to harvest data. This was a big challenge to be able to properly compare these.

The other big technical challenge centered around estimating how much total marijuana is consumed in Oregon and running some scenarios (Monte Carlo simulations) to model the probability that demand is meeting supply. To get at statewide demand, across all markets, OLCC used survey data and some academic studies. You can see part of this work in Figure 16 below from the technical appendix to the report. What it shows is how much marijuana is consumed per day by frequency of use. As with most products, heavy users account for the vast majority of consumption.

From there they could compare actual sales to this estimate of statewide demand. They found that 55% of total statewide marijuana consumption was purchased at recreational retailers. That means 45% of consumer demand is being met by the black market, medical market, and/or home grows.

From a big picture perspective, there are some clear successes here. Recreational sales used to be 0% of the market and are now 55%. Additionally, while there is an oversupply even within the recreational system, the vast majority of this product is remaining in the legal system. Currently inventory stands at around 6.5 years of sales (based on amount of THC). This is a huge number, full stop. But it also means most of the oversupply is being accounted for. All of that said, there is a concern that more may be diverted to the black market and/or out of state given current market conditions (high supply, falling prices, and a huge pipeline of applications for new entrants into the market).

The report also notes the different channels in which demand can increase to meet current production levels. This includes an increase in the number of consumers (like the first chart above), more consumption by current users (increases in the second chart above), and/or increased market share for recreational marijuana. I believe we will see improvements in all three areas. In fact the usage numbers reported above are already above the Monte Carlo upper bound from the OLCC report — note that this is just one component of the work and by itself is not enough to overturn the findings. However, given that big pipeline of applications for new producers, processors and retailers, the supply side doesn’t look like it’s slowing down any time soon either. The market continues to search for an equilibrium.

Third, the Brewers Association’s Chief Economist, Bart Watson, recently wrote up his thoughts and findings on the impact of cannabis on beer. He also provides a link to a distilled spirits report looking at cannabis and spirits, but I haven’t read that yet. In sum, Bart finds no evidence of cannabis impacting beer sales. Yes, per capita beer sales are falling but they were falling before much of the marijuana legalization in recent years. And recreational or medical state trends for beer are not different. Bart explains “most of beer’s decline [is] due to competition with wine/spirits [due to] things like demographics and prices.” There’s a lot more in his article, including thoughts on how to interpret survey results, how all of this may shift moving forward and how cannabis is impacting business operations, even if not sales (yet).

Posted by: Josh Lehner | January 29, 2019

Oregon’s Housing Supply

Yesterday I was invited to testify about housing supply at the inaugural meeting of the Senate Committee on Housing. I was joined by Mike Kingsella, Executive Director of Up For Growth. Combined, the two of us covered the low levels of new construction, housing supply constraints, affordability being a statewide problem, and one reason our office cares so much is the risk that affordability may potentially choke off migration flows, lowering our longer-run forecasts for, well, everything. In the ensuing discussion, Senator Golden asked a number of questions in which I should have done a better job articulating my answer and our office’s research. This post helps clarify and expand upon those questions.

We know new construction in Oregon remains at relatively low levels when compared with the past. However, what truly matters is the balance between supply and demand. Taking into account population increases, and household formation is the correct way to gauge whether or not an imbalance exists, not just looking at total housing starts by themselves. The problem that arises is how best do you measure housing demand? Household formation is ideal, but it is endogenous, or jointly determined with supply and affordability. If we had more housing supply and prices were lower, then we would see stronger household formation because more people could live on their own, etc.

As a rough estimate, one can look at the number of new housing permits issued per 100 new residents. Oregon’s modern history is shown in the chart below. I have also included new permits per the growth in the adult population which may be a better proxy for housing demand. Either way, Oregon continues to see very low levels of new construction since the housing bust. Yes, new construction overall is up, but so too is population growth and migration flows. Oregon remains near historic lows for new construction on a population-adjusted basis.

At the regional level we see similar patterns. All regions of Oregon today are construction fewer units on a population-adjusted basis than in the two decades prior to the housing bubble. Note: 2018 data is not complete and not available for all counties yet, in part due to the Federal shutdown that delayed data releases. That said, statewide 2018 permits were down relative to 2017. One more year of data isn’t saving us.

Turning the above into a direct analog to the permit chart used yesterday shows the drop in new construction relative to population growth in percentage terms. Some regions look better here than in the older chart. For instance, Senator Golden’s Rogue Valley is down 50% in absolute terms but is down “just” 31% on a population growth adjusted basis. Conversely the Columbia Gorge is issuing a third fewer permits in recent years, but population growth has surged and on a population-adjusted basis they are seeing 70% less new construction.

Finally, the potential issue of differences seen in the Portland area versus the rest of the state was raised. This is the part I stumbled all over myself, but did manage a correct but incomplete answer. First, as seen above, the low levels of new construction truly is a statewide (and region-wide) problem. Portland is building more units today than 20 years ago, but not on a population-adjusted basis.

That said, we are seeing diverging trends lately in Portland versus the other markets in the state I have looked at. We know the Portland housing market is rebalancing. The increase in new multifamily construction is now slowing rents across all price points, and Mike testified yesterday. And for sale inventory is rising and home prices slowing. However, none of this appears to be happening elsewhere in the state. At least as far as I can tell (email me). In Bend, Eugene, and Salem, for instance we are not seeing an increase in inventory, or time on market, and price appreciation remains in the high single digits over the past year. Furthermore, the increase in multifamily is nearly entirely confined to the Portland region. Multifamily activity in the rest of the state remains 30% lower than two decades.

Bottom Line: The housing supply and affordability challenges truly are statewide issues. The increase in new construction activity in recent years has barely kept pace with the increase in population growth. A market imbalance remains. That said Portland is rebalancing and the supply of new apartments is beginning to hold down rents. However these trends are not yet seen elsewhere in the state. Over the next couple of years, with a little more new construction, and slowing population gains, such trends should become evident in other markets, but we are not quite there yet.

Posted by: Josh Lehner | January 23, 2019

Manufacturing’s Evolution (Timber- and Tech-Related)

The big piece of news this week, as reported by Mike Rogoway in The Oregonian, is the potential for another big Intel investment as they look to increase capacity and develop the next generation of chips. As I mentioned to Mike, this is great news for the regional economy for a number of different reasons. First, Oregon will see a large investment and construction boost just as the economy is slowing down. This is something the rest of the country will not experience; as such it should help maintain our stronger growth a bit longer. Second, and more importantly from a long-term perspective, this proposed investment and expansion signals that Oregon will remain the home to significant, cutting-edge R&D operations for the foreseeable future — in the case of high-tech this means at least the next 5-10 years.

Oregon’s high-tech manufacturing sector has not increase employment since the dotcom crash and is not really expected to either in the future. Our office’s forecast calls for stable employment overall, as some of the firms, like Intel, expand and some of the older tech manufacturers cut back. This is largely due to the high productivity of the industry, where investment and innovation increase but employment does not. That said, Oregon’s tech manufacturers remain an economic pillar of our region and we continue to see a shift in the types of jobs the sector employs. Currently, 43% of these jobs are in engineering, computer science, and software-related occupations. Another 18% are made up of managerial, and business and finance occupations. Taken together, 60% of Oregon’s tech manufacturing jobs are white collar, professional types. Production occupations — the workers who actually make things — account for just one out of every four jobs today.

This breakdown may be surprising, but is the continuation of trends we have seen in recent decades. Among our tech manufacturers, all of the growth in employment in the past 30 years is among these white collar, managerial and engineering types. The local impact in terms of R&D, innovation, patents and the like is also driven in large part by these jobs. They are also very high-paying as the overall sector’s average wage in 2017 was $126,000, or more than twice that of the statewide average. Now, production jobs within tech manufacturing have held fairly steady since 1990, but have certainly not seen similar growth. It should also be noted that these production jobs, like production jobs in other sectors, pay an average wage of $40,000 per year. As discussed before, there is no longer a manufacturing wage premium relative to other industries, even within high-tech.

All of this brings us to a larger point about manufacturing jobs today compared to decades past. I was talking with Ron Fox, then the executive director of SOREDI, a handful of years ago. Ron wanted someone to make a manufacturing jobs poster to show high schoolers how the industry has changed. The poster would have two pictures on it. The first would be calloused, greasy hands to represent manufacturing jobs of the past. The second would be clean hands at a keyboard to represent the manufacturing jobs of the future. Ron’s keen observation of the evolving manufacturing sector is correct. Today in Oregon there are nearly as many of the white collar, managerial and engineering types of jobs in manufacturing as there are production jobs. We have seen a big shift over the past 50 years. And more to Ron’s point, the type of work done by those working in production occupations has shifted as well. The work is more computerized and less manual, although not entirely so of course.

Now, there a number of caveats and facets to this discussion. First, the stagnation and decline of production jobs in Oregon and across the country is a problem. See our job polarization report for more. Second, a good chunk of the trends above can be explained by what our office calls The Changing of the Guard in Oregon’s economy. This refers to the fact that the rise of Oregon’s high-tech sector has nearly perfectly offset the decline of the timber industry. (Not that it was harmless, just that the two sectors’ trends have offset.) We can see this in the chart above as well. Roughly half of the white collar job gains statewide are due to the tech manufacturers and much of the production and all other employment declines are tied to the timber industry (all other includes loggers and truck drivers who work directly for manufacturing firms and not third parties).

All of that said, the rise of the white collar manufacturing jobs is still seen among Oregon’s non-tech, non-timber manufacturers as well. Back in 1970, the managerial and engineering type occupations accounted for 10% of all non-tech, non-timber manufacturing jobs statewide. Today they have more than doubled in absolute numbers and account for 25% of these manufacturing jobs.

Bottom Line: Even as the economy overall continues to evolve away from manufacturing and into services, there is a stark evolution taking place within manufacturing itself. White collar, managerial and engineering type jobs are on the rise, through good economic times and bad. This growth is good news for our regional economy, from an employment, wage, innovation and R&D perspective. It also shows how the U.S. and Oregon are growing the portions of the value chain where we have a competitive advantage relative to the rest of the world. That advantage is not in the low-cost, mass production of products, but in the development process. That does not mean that the stagnation and decline of production jobs in the U.S. and in Oregon is costless because it certainly is not. Even if on net the good outweighs the bad, there are localized impacts on regional economies and among certain types of workers.

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